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Listen: Russia weighs up January crude output cut, impact of new US administration on oil sector

Preliminary data for January indicates that Russian oil producers are complying with an OPEC/non-OPEC deal to cut crude output, which alongside Russia's relationship with the new US administration looks set to have a significant impact on Russian oil in 2017. Nadia Rodova, managing editor at S&P Global Platts bureau in Moscow discusses these key trends with Moscow-based editors for oil news Rosemary Griffin and Nastassia Astrasheuskaya.

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Podcast Transcript

Nadia: Hello and welcome to Platts Energy Spotlight podcast for February 3rd. I’m Nadia Rodova, managing editor at S&P Global Platts bureau in Moscow. I’m joined here today by Rosemary Griffin and Nastassia Astrasheuskaya, Moscow-based editors for oil news.

We are going to discuss two key developments that are set to have a serious impact on the Russian oil market in the near term – the OPEC/non-OPEC crude production cut deal and the potential lifting of sanctions by the new US administration.

Preliminary January statistics published yesterday confirmed that Russia has moved ahead with its own production cuts faster than planned. The output dropped by around 100,000 b/d from October levels, twice as much was initially planned. At the same time, we saw various estimates, which differ by around 25,000 b/d.

Normally, we would consider this a statistical discrepancy, given the scale of Russian production of around 11 million b/d. But currently the market is watching carefully whether Russia and other oil producers meet their cut obligations.

And unlike OPEC countries, whose compliance will be measured against results provided by secondary sources, including Platts, Russian compliance will be measured using its own statistics. So, Nastassia, what do the figures tell us?

Nastia: Well, firstly they indicate that Russia is complying with the deal, under which it committed to gradually reduce its daily output by 300,000 b/d in the first half of the year. Russia initially indicated that it would cut around 50,000 b/d in January, then bring it to 200,000 b/d by the end of the first quarter and finally hit the target cut volume by the end of April.

In fact, production fell much more significantly. And unusually cold temperatures at the start of the year played a role here.

Production in West Siberia was hit by a severe cold snap with temperatures reaching below -60 degrees Celcius in certain areas at the turn of the year. That led crude output to drop by as much as 151,000 b/d on certain days.

Nadia: Right. When temperatures gradually returned to normal in the middle of the month production levels rose. So it remains unclear, to what extent the cut was due to cold temperatures and to what extent it was a result of companies’ efforts. Rosemary, how indicative are the January results?

Rosemary: Well, we still have some way to go to reach the eventual target, so the next few months will be interesting. If we look beyond the statistics, the mood in Moscow remains positive about the deal. Russian energy minister Alexander Novak is happy with Russian companies’ compliance and sees a positive impact for both oil producers and authorities if the plan works and we see less price volatility in the market.

On the flip side risks remain and the situation could deteriorate if prices drop or there is evidence of non-compliance among other participants.

Nadia: Right, we should also remember that January daily production in Russia often comes below December levels on seasonal factors, but tends to grow later in the year, so the market will continue to monitor the situation closely.

In terms of other developments that could directly impact Russian producers, rumors began to circulate late last week that US President Donald Trump might cancel sanctions against Russia.

Rosemary: Yes, on Friday sources both in the US and in Russia indicated that Trump might cancel the sanctions within days. He has not yet done that, leading some in Russia to speculate that those who hoped that Trump would pursue policies more favourable to Russia were being overly optimistic.

Trump himself said it was “very early to be talking about that” when asked about sanctions last weekend. If he takes no action then sanctions will remain in place until early next year, as Barack Obama extended them shortly before he left office.

Nastia: It will also be interesting to see what policies Rex Tillerson, who was appointed the new US secretary of state this week, decides to pursue. Former CEO of Exxonmobil, he has extensive experience working with Russian officials and saw Exxon’s cooperation in Russia hit by the sanctions. This led to some speculation that he may adopt a more positive approach toward Russia when he was first nominated.

Tillerson has made some controversial remarks. Some were encouraging, say, when he said the US must keep an “open and frank dialog” with Moscow. But some of his other statements indicated he may take a relatively hard line on Russia and sanctions. He said, for instance, that some recent Russian actions have "disregarded American interests," and described sanctions as a powerful, important tool of US foreign policy to prevent countries or individuals from taking bad actions or to punish them after the fact. So we’ll really have to wait and see what sort of policies he pursues now that he’s in office.

Nadia: So far, the Russian oil sector seems to have adapted to the sanctions that were initially introduced in 2014 and limited Russian producers’ access to Western financing and certain equipment. Despite the sanctions and the low oil price environment, crude production in Russia has grown steadily in annual terms recently.

Output at Russia’s only producing project in Arctic waters, Prirazlomnoye, for example, which is targeted by the sanctions, rose nearly three-fold last year to over 43,000 b/d.

Technological sanctions are expected to have a bigger impact on future production in Russia. But financial sanctions are already biting and it’s unclear how long Russian producers can withstand them before we see an impact on Russian output.

Nadia: That was Rosemary Griffin, Nastassia Astrasheuskaya and Nadia Rodova today in the studio. Join us again next time for Platts Energy Spotlight podcast.